Quick quiz: Name the only two countries in the world that tax based on citizenship and not residency?
Answer: The United States and Eritrea.
If you are reading this post, you are likely considering a move to Canada for any number of reasons. Lower income taxes are probably, not on that list. What you may not know is that even when you leave the United States, you still have tax reporting obligations to the IRS.
You’ve lived your life in the US, and you’ve never given any thought to how you might be taxed if you left the country. It’s now time to give it some thought!
The US taxes its citizens and green card holders no matter where they live. If you are US Person (the term for Citizens and Green Card holders) and live in Canada, you are still subject to US income tax filing every year.
What this means is that when you become a resident of Canada, you will have to consider both your Canadian taxes and your US taxes.
For some people, residency is a fairly simple thing. They sell the house in the States, move the family up north and establish all new connections. For others, it can be much more complicated. What if you move up to Toronto or Vancouver but travel back to see your family regularly? Lots of people straddle the border which makes confirming your tax residency more difficult.
As a US person (citizen or Green Card holder who has not renounced), no matter where you live you will have tax filing requirements with the IRS. If you are deemed a resident of Canada, you will also have tax filing requirements here.
Unlike the United States’ Substantial Presence rules, which mostly trips up Canadian Snowbirds, Canada determines residency based on two principals;
Factual Resident-your primary residential ties like you own/rent a home and your family are in Canada with you along with financial ties such as Canadian bank accounts, Canadian Driver’s license etc. in Canada, or;
Deemed Resident- if you stay in Canada for 183 days a year or longer and have no other residential ties, you will likely be deemed a tax resident unless you can prove closer ties to another country
In the event of any dispute, the Canada- US Tax Treaty provides a “tie-breaker” mechanism under article IV(2) that helps to determine if you are a resident of the US or Canada to confirm where you should be filing income tax returns.
However, there is some good news.
Canada and the US have a tax treaty which eliminates double taxation in almost all cases. That means that tax paid to one country gets you credit when filing taxes in the other country. There are some important planning considerations to avoid those few instances where you might get double taxed but that’s a topic beyond the scope of this post.
Moving to Canada from the United States is not a simple or quick thing to do. It requires patience and careful planning. Prior to coming you should have a clear picture of your tax residency and reporting obligations. It could make a huge difference in your ability to plan your finances while in Canada.
